E.U. – Iran Energy Partnership:Hurdles and Incentives

Clement Therme 21 November 2008

Conference on Energy Security and the Geopolitics of Energy

Cyprus

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Introduction

• The reasons why Iran could be an energy partner for E.U. countries

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Introduction (cont’d)

• The reasons why Iran could be an energy partner for E.U. countries:

– Economic Logic: Iran is the only country which could offer an alternative to the Russian gas production

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Introduction (cont’d)

• The reasons why Iran could be an energy partner for E.U. countries:

– Economic Logic: Iran is the only country which could offer an alternative to the Russian gas production

– E.U. countries oil and gas companies are present in Iran (Total, ENI, Repsol, OMV…)

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Introduction (cont’d)

• The reasons why Iran could be an energy partner for E.U. countries:

– Economic Logic: Iran is the only country which could offer an alternative to the Russian gas production

– E.U. countries oil and gas companies are present in Iran (Total, ENI, Repsol, OMV…)

– Increase of gas demand in E.U. countries

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Introduction (cont’d)

• The reasons why Iran could be an energy partner for E.U. countries:

– Economic Logic: Iran is the only country which could offer an alternative to the Russian gas production

– E.U. countries oil and gas companies are present in Iran (Total, ENI, Repsol, OMV…)

– Increase of gas demand in E.U. countries– Diversification of energy providers

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Introduction (cont’d)

• The reasons why Iran could be an energy partner for E.U. countries:

– Economic Logic: Iran is the only country which could offer an alternative to the Russian gas production

– E.U. countries oil and gas companies are present in Iran (Total, ENI, Repsol, OMV…)

– Increase of gas demand in E.U. countries– Diversification of energy providers – Geographical proximity

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Introduction (cont’d)

• Despite this obvious potential for cooperation, Iran is not an energy partner for E.U. countries at the moment.

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Introduction (cont’d)

• This presentation will focus on:

– The reasons for the lack of E.U.-Iran energy partnership

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Introduction (cont’d)

• This presentation will focus on:

– The reasons for the lack of E.U.-Iran energy partnership;

– Whether Iran could be a reliable partner.

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Main Themes Developed

1. Historical Background of Iran-Europe Energy Cooperation

2. Current and Potential Energy Cooperation

3. Political and Economic Obstacles to a Partnership

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Historical Background of the Iranian Oil and Gas Sector

• British imperialism in Iran: 1908-1953

• American-Iranian alliance: 1953-1979

• Iranian perception: Mistrust of Western energy policy

• 1970: First Iranian gas export towards Europe (swap with Russia)

• 1979: Suspension of cooperation until the end of the Iran-Iraq war

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Historical Background (cont’d)

• 1990-2005: Investment of European energy companies in Iran; Increase of Iranian oil and gas production

• 2005: Increased American pressure to stop Iran-E.U. energy cooperation

• Nov. 2007: Gordon Brown favors international or E.U. sanctions against the Iranian energy sector

• Summer 2008: Electricity cuts in Tehran

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Current Energy Cooperation

• Effective Cooperation:

– Gas production: South Pars

– Petrochemical field

– CNG (Compressed Natural Gas)

– Oil production

– Contract negotiations

– German gas deal

– Swiss gas deal

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South Pars Offshore

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South Pars Onshore

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Potential Energy Cooperation

• The Nabucco Project:

– One of the main projects of the E.U. Commission

– Azerbaijan gas not sufficient to fill up the gas pipeline

– Alternative to Russian gas: The “raison d’être” of the project (diversification) will be altered

– The most logical solution: Opting for Iranian gas provided E.U. companies invest in the Iranian gas sector so that both domestic and international demands can be met

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Kayhan International, 24 Nov. 2007

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Iran Daily, 27 Nov. 2007

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Contours of the Nabucco Project

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Potential Cooperation (cont’d)

• Liquefied Natural Gas (LNG)

– 1st project: Pars LNG (Total/Petronas)

– 2nd project: Shell/Repsol/NIOC

– 3rd project: Iran

• Privatization of the Iranian energy sector: closer to the E.U. model compared to the Russian model (State control of energy resources)

• Technological advantage of European energy companies

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Potential Cooperation (cont’d)

• Iran as transit country for Caspian oil and gas production

– For the first time since the fall of the Soviet Union, Iran has become a transit country for Azeri oil after the BTC attack (August 2008); Swap: Iran gets Azeri oil for its domestic consumption and in exchange Iran exports the same amount of oil from Khark island

– Neka /Jask pipeline project: Connection between Caspian Sea and Oman Gulf

– Azerbaijan/Turkmen gas export towards Europe through Iranian territory

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Political Challenges

• Iranian energy nuclear program

• U.S./E.U. strategy: Economic sanctions targeting LNG and refinery technology

• U.S. containment policy vis-à-vis Iranian energy development

• Cutting off Iran gasoline imports

• Islamic Republic of Iran Israel Policy

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Political Challenges (cont’d)

• The Eastern trend of Iranian foreign policy : Political will to increase oil and gas cooperation with Russia, China and India (Peace Pipeline)

• The new oil and gas administration after Ahmadinejad’s presidency: Ideological objectives supersede Realpolitik

• Iran imports gas, Iranian priorities still have to be defined:

– Domestic consumption

– Gas injection in oil fields

– Exports: Pipelines or LNG

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Economic Challenges

• Increase in domestic oil and gas demand

• Lack of investment in Iranian oil and gas sectors

• Iran-Turkey energy relationship

• Lack of cooperation between E.U. countries regarding energy policy

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Economic Challenges (cont’d)

• Dual use technology: Oil and gas/nuclear program

• Increased financial costs and difficulty to finance oil and gas projects in Iran (U.S. unilateral financial sanctions)

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Conclusion: The International Context

• The so-called Gas OPEC Project:

– “Troïka” between Iran, Qatar and Russia

– Iranian technological dependency vis-à-vis Western technology (refinery, LNG)

• Prospects:

– Hypothesis: Coalition of countries willing to sanction Iran will lead to a rapprochement between Iran and Russian/Chinese oil and gas companies

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Conclusion (cont’d)

• Need of an independent strategy of the E.U. vis-à-vis the U.S.

• Iran has to act in accordance with its national interest (Western technology favored)

• E.U. countries can use the energy threat against the Iranian nuclear program but risk of failure if the international community is divided

• Need to avoid ideological strategies and rather focus on the E.U.-Iran common interest as political leverage to solve the Iranian nuclear issue

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The End